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The American Illusion of Wealth

October 15, 2010Joshua Sanders

It is stunning that so many people (at all levels) in this country believe that high consumption levels are paramount to a sustainable economy. The problem with this system is that even now when we are in a recession, which was essentially caused by our over-consumption of foreign goods and a lack of domestic investment (ie savings, production, etc.), so many are advocating policies that would only revert the country back to the old system.

Without production and investment an economy will be unable to sustain itself. In the United States, consumption accounts for 70 percent of GDP. Of this 70 percent, over half is spent on services. The U.S. spends 22 percent of consumption on real estate (a dead market) and health care (a high-cost market with low direct economic benefit). Approximately Two thirds of federal expenditures (8 percent of GDP) is spent on the defense budget; total government expenditures make up 20 percent of GDP, with state and local governments spending 12 percent. Bringing up the rear at 16 percent of GDP is private savings and investment. Just to get the ball rolling, let’s throw in the U.S. trade deficit, which reached $816 billion in 2008 (it decreased in 2009 because of the global recession) and is on pace to hit similar levels in 2010.

These numbers paint a bleak picture. As members in a service-based economy the majority of Americans are unable to produce real wealth. American jobs essentially consist of selling and transitioning the sale of foreign goods. The same companies that pay our wages are generating the profits from our consumption. Generally, this is a perfectly acceptable system and exactly the kind of system that sparked such huge growth in America’s golden era. However, the companies paying our wages now are for the most part foreign-owned or internationally financed. Essentially, what Americans are doing is passing around money that is financed and controlled by foreigners, and then using that money to buy more foreign goods. What little wealth that is created from a service economy is sent right back into the hands of foreigners.

We have become a nation enslaved by consumption, and as a result the wealth our country once held has been transferred to countries like China and Germany. The U.S. economy has become an outsourcer of not only workers and production but of our own investment.

For years now we have relied on a housing bubble to provide wealth generation and retirement funds. As a result, interest rates were kept low and the savings rate was practically non-existent; Americans only save 1 percent of their income. Since the U.S. has no savings, investments must come from foreign entities. The federal government must fund their deficit and expenses somehow, and they do it buy selling U.S. Treasury bonds on the international market. These bonds represent debt owed by the American government to the holder; about half of this debt is held by foreign entities.

China, the largest international holder of U.S. Treasury bonds (21 percent), represents the largest source of foreign imports to America. Almost 33 percent of our trade deficit comes from China. The dominant catalyst: Chinese currency manipulation that amounts to a 40 percent increase in export costs and a 40 percent reduction in import costs. The Chinese government has deliberately purchased U.S. debt in order to mitigate the yuan’s appreciation against the dollar. By maintaining a low-value currency relative to the dollar, China has been able to boost exports by offering low-cost goods to American consumers. In the short-term, Americans witnessed a benefit from this practice as our shores were flooded with low-price goods. Now we see the disastrous results this had on middle class incomes and unemployment.

America needs to restore domestic manufacturing and investment. The interest rate needs to be pegged to the amount of domestic savings. This system prevents the Fed from creating bubbles and it ensures that Americans are motivated to save and invest. Implementing a value-added tax would provide further incentive for Americans to save and take less toll on the natural economic order. When Americans increase their savings rate, the Federal government will have to rely less on foreign financing and can start to reduce the budget deficit with domestic funds, which will be returned to American businesses and consumers. Alongside a restructuring of our interest rate system, America needs to counter and resist Chinese currency manipulation. Fortunately, our representatives are already working on this. The third facet is to eliminate policies that deter domestic manufacturing. Increasing domestic savings and investment will help, but current American policies and international agreements practically force U.S.-based manufacturers to offshore or outsource their operations. To reverse this trend, the United States must utilize its legal recourse and take a temporary leave of absence from the WTO. This will allow the United States to negotiate trade policies that will provide incentives for U.S. manufacturers to remain in the United States.

We can restore economic prosperity to the United States. The fact of the matter is, many in Congress either don’t know what to do or are extremely reluctant to do anything because of the upcoming midterm election. American citizens must TELL our representatives what needs to be done; tell them their office depends on it. When you read something on EconomyInCrisis that you agree with, pass it along to your representatives. Copy and paste it if you’d rather. The point is, we alone have the power to save our economy and our country. And it is every American’s duty to do so.